November 21, 2018/InvestmentOne Report
· Earlier today, the National Bureau of Statistics (NBS) released the Inflation report for the month of October 2018, which showed headline inflation inch down to 11.26% year on year (y/y) in October 2018, from 11.28% y/y in September 2018. This was slightly above our best case scenario estimate of 11.22% and just below our base case (11.31%). The variance in our best case estimate and actual inflation figure was due to a higher than expected increase on month on month basis (0.74% actual vs 0.69% estimate).
· With the high base effect of H1 2017 fading out, inflationary pressures appear to be more prevalent on y/y readings in H2 2018. However, the headline inflation slowed down m/m to 0.74% in October 2018 from 0.84% in September 2018.
· The marginal slowdown may have been influenced by a corresponding decline in the Food-Sub Index (13.28% y/y in October 2018 vs 13.31% y/y in September 2018). Also apparent is the 18 basis points (bps) month-on-month (m/m) drop in food inflation to 0.82% from the preceding month.
· The Core-Sub Index inched up slightly by 4bps to 9.88% y/y and 16bps to 0.80% m/m.
· We highlight that stability in the PMS price as well as exchange rate might have limited the increase in Core Sub Index, thus translating to its insignificance in directing the headline inflation movement.
· On the other hand, Food inflation continued to dictate CPI rate, moderating by 3bps to 13.28% y/y, while imported inflation decreased by 9bps to 15.57% y/y.
· Our opinion is further backed by inflationary prospects driven by the conflicts in the Northern region disrupting food supply, election spending, and the possible acceleration in the implementation of the N9.12trillion 2018 budget. In the same vein, imminent rise in minimum wage and election spending may cause a spike in general price level in the near term.
· On the other hand, the statement released by NNPC concerning the surge in the landing cost of Premium Motor Spirit (petrol) to above N200 per litre may put more pressure for PMS price to increase in the near term. We opine that the risk may be exacerbated as we approach the yuletide season, occasioned by increased demand and fuel scarcity.
· Nonetheless, we expect government to remain committed to sustaining adequate supply and maintaining the official PMS price at N145 per litre, as this may have some effect on the current administration’s reelection bid in 2019.
· As a result of the potential increase in money supply and inflationary pressures, we could see the Monetary Policy Committee (MPC) tightening its stance in Q4 2018 by increasing the frequency of its Open Market Operations (OMO auctions) with the potential of selling these bills at higher stop rates. This could help to fight against inflation, albeit negative for economic growth in the near term.
· Nonetheless, we maintain our opinion of the MPC retaining its benchmark interest rate at the end of its meeting tomorrow.